2006 PLP 103 (PTD)

MUHAMMAD MUJEEBULLAH SIDDIQUI, J.

This appeal arises out of the order, dated 29-9-1998, passed by the learned I.T.A.T. The Commissioner of Income Tax, has proposed the following questions of law for our consideration. Whether Interest paid is an allowable deduction under section 18(3) of the Income Tax Ordinance, 1979 for the purpose of earning exempt income under section 17(1)(a). (2) Whether on the facts and in the circumstances of the case especially when the issue of disallowance of financial expenses allocable to investment in Bearer National Fund Bonds (a source the resultant income of which is exempt from tax) was a matter of further enquiry? Honourable I.T.A.T. was justified in deleting the addition instead of setting aside the assessment on this issue for further enquiry and de novo consideration." Heard Mr. Nasuullah Awan, learned counsel for the appellant, Mr. Iqbal Salman Pasha, learned counsel for the respondent and perused the orders passed by the learned forums below. On perusal of the orders passed by the learned officers below and the I.T.AT. we find that the relevant facts are that the respondent made investment in Bearer National Fund Bonds, income whereof is exempt from tax. A question arose, whether this investment was made out of respondent's own capital or from the borrowed capital. The Assessing Officer gave the following finding in the assessment order:-- "(2) Expenses incurred on earning exempt income: The assessee company was confronted vide this office letter, dated 10-5-1990 as to why interest expenses on investment in Bearer National Fund Bonds may not be disallowed when the resultant profit was exempt from tax. In reply the assessee vide it's A.R. letter, dated 14-5-1990 contended as under: "??No borrowed money was invested in bond. The balancesheet shows enough reserves which were utilized for the purposes (Attention is invited to minutes of the meeting of Board of Directors held on 17-6-1986 working paper of the said meeting is annexed). Statement of `statutory loss' accompanied with the return after adjustment of declared loss for this year at Rs.3,64,29,738 shows assessed losses at Rs.1,97,01,19,052.... The matter has been examined. The assessee has failed to establish that borrowed funds were not invested in Bearer National Fund Bonds or KDC etc., since assessee's own financial resources stand invested in other assets. Investment in bonds is 116.452. Million during this year whereas total investment amount to Rs.126.452 M. It is therefore clear that borrowed money was also used for investment purposes. The interest on

Cotton Export Corp. of Pak. Ltd. Expenses on capital invested in bearer bonds is worked out in the same proportion as the capital invested in bonds has with the total funds available with the assessee. =400.851 x 116.452=? 21.138 M. 2208.332 In view of above, interest expenses allocable to capital invested in Bearer Bonds is worked out to Rs.2,13,80,000 and the same is disallowed as confronted to the assessee company vide order sheet, dated 18-3-1991. The addition on the same ground was maintained by CIT (Appeals) Zone-III vide No.578/ CIT(A)/III/89-90, dated 6-11-1990 for the assessment year 1988-89." The respondent preferred appeal before the learned CIT(A) contending that the disallowance of interest as above was not justified. The learned CIT(A) by placing reliance on the judgment of Tribunal for the earlier year directed that the whole interest in respect of capital invested be allowed. The Department preferred second appeal before the ITAT, which was dismissed for the reason that the point in issue stands decided in the appeal for the earlier year. Being aggrieved the Department has filed this appeal before us, contending that the Tribunal at the most could set aside the issue for further inquiry and de novo consideration instead of deleting the addition. Mr. Nasrullah Awan, learned counsel for the appellant has submitted that every assessment year is separate and independent unit and the facts prevailing in every assessment year are to be considered independently. He has submitted that if in the earlier year the entire investment was made out of the respondent's capital, it is not necessary that in the assessment year under consideration also the same position was prevailing, and therefore, the ITAT ought to have set aside the issue with direction to consider the facts whether on the date of investment sufficient capital was available with the respondent other than borrowed capital and thereafter the issue could have been decided in right perspective. Mr. Iqbal Salman Pasha, learned counsel for the respondent has supported the orders passed by the CIT(A) and the learned ITAT and has reiterated that the issue stands decided by the Tribunal in the appeal for the earlier year. We are persuaded to agree with the contention of Mr. Nasrullah Awan, that every assessment year is an independent unit and the facts prevailing in every assessment year are to be considered separately. We are further of the opinion that in order to clinch the issue, it was imperative to examine the position of cash flow on the date of investment. If on the date of investment sufficient capital was available with the respondent other than the borrowed capital and the evidence was produced to the effect reflecting in the entries in the account books that the investment was made from the respondent's own capital and not from the borrowed capital, then the respondent was entitled to the entire allowance under the head interest paid on the borrowed capital. Conversely, if sufficient capital of its own was not available with the respondent or investment was made out of borrowed capital and not from its own capital, in that case the treatment given by the Assessing Officer would be justified. In the above circumstances, we set aside the assessment order, the order of CIT(A) and the Tribunal's order to the extent of finding on disallowance of interest at Rs.2,13,80,

000. The matter is remanded back to the Assessing Officer, with direction to serve a detailed notice on the respondent calling upon to produce the record and the entries showing the position of cash flow on the date/dates of investment made by the respondent in purchasing the Bearer National Fund Bonds. After factual probe as explained above, if it is found that the investment was made out of the respondent's own capital then no disallowance is to be made. However, if it is found that the investment was made out of borrowed capital, then to that extent the disallowance would be made out of the allowance claimed for interest paid on borrowed capital. The appeal stands disposed of as above. S.A.K./C-43/K??????????????????????????????????????????????????????????? Case remanded.